We analyze the macroeconomic implications of increasing the top marginal income tax rate using a dynamic general equilibrium framework with heterogeneous agents and a fiscal structure resembling the actual U.S. tax system. The wealth and income distributions generated by our model replicate the empirical ones. In two policy experiments, we increase the statutory top marginal tax rate from 35 to 70 percent and redistribute the additional tax revenue among households, either by decreasing all other marginal tax rates or by paying out a lump-sum transfer to all households. We find that increasing the top marginal tax rate decreases inequality in both wealth and income but also leads to a contraction of the aggregate economy. This is primarily driven by the negative effects that the tax change has on top income earners. The aggregate gain in welfare is sizable in both experiments mainly due to a higher degree of distributional equality.

This paper looks into the specific influence that the European banking union will have on (future) bank client relationships. It shows that the intended regulatory influence on market conditions in principle serves as a powerful governance tool to achieve financial stability objectives.
From this vantage, it analyzes macro-prudential instruments with a particular view to mortgage lending markets – the latter have been critical in the emergence of many modern financial crises. In gauging the impact of the new European supervisory framework, it finds that the ECB will lack influence on key macro-prudential tools to push through more rigid supervisory policies vis-à-vis forbearing national authorities.
Furthermore, this paper points out that the current design of the European bail-in tool supplies resolution authorities with undue discretion. This feature which also afflicts the SRM imperils the key policy objective to re-instill market discipline on banks’ debt financing operations. The latter is also called into question because the nested regulatory technique that aims at preventing bail-outs unintendedly opens additional maneuvering space for political decision makers.

In this statement the European Shadow Financial Regulatory Committee (ESFRC) is advocating a conditional relief of Greek’s government debt based on Greece meeting certain targets for structural economic reforms in areas such as its labor market and pensions sector.The authors argue that the position of the European institutions that debt relief for Greece cannot be part of an agreement is based on the illusion that Greece will be able to service its sovereign debt and reduce its debt overhang after implementing a set of fiscal and structural reforms. However, the Greek economy would need to grow at an unrealistig level to achieve debt sustainability soley on the basis of reforms.The authors therefore view a substantial debt relief as inevitable and argue that three questions must be resolved urgently, in order to structure debt relief adequately: First, which groups must accept losses associated with debt relief. Second, how much debt relief should be offered. Third, under what conditions should relief be offered.

In light of the failed negotiations with Greece, Jan Krahnen argues that an effective reform agenda for Greece can only be designed by the elected government. Fundamental reforms will take time to take full effect and euro area member states will, in the meantime, have to offer Greece a basic level of economic security.
Krahnen demands that policy makers and the professional public involved view the Greek crisis as an opportunity to take the next necessary steps to formulate a reform agenda for the European Monetary Union. A community of supranational and non-party researchers and intellectuals could take the initiative and in a structured process develop a trustworthy and realistic concept that drafts the next big step towards a political union of Europe, including elements of a fiscal union.

When markets are incomplete, social security can partially insure against idiosyncratic and aggregate risks. We incorporate both risks into an analytically tractable model with two overlapping generations. We derive the equilibrium dynamics in closed form and show that joint presence of both risks leads to over-proportional risk exposure for households. This implies that the whole benefit from insurance through social security is greater than the sum of the benefits from insurance against each of the two risks in isolation. We measure this through interaction effects which appear even though the two risks are orthogonal by construction. While the interactions unambiguously increase the welfare benefits from insurance, they can in- or decrease the welfare costs from crowding out of capital formation. The net effect depends on the relative strengths of the opposing forces.